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Kurt Schuler endorses NGDP targeting

Long time free banking advocate Kurt Schuler has a new piece at freebanking.org in which he endorses NGDP targeting.

This is Kurt:

Given that I do not expect to see free banking in the immediate future, I would like to see one, or preferably more, central banks that now target inflation try targeting nominal GDP targeting instead. Targeting nominal GDP has some prospective advantages over inflation targeting. One is that nominal GDP targeting allows what seems to be a more appropriate behavior for prices over the business cycle, allowing “good” (productivity- rather than money supply-driven) deflation during the boom and “good” inflation during the bust.

I agree very much with Kurt on this and it is in fact one of the key reasons why I support NGDP targeting. Central banks should indeed allow ‘good deflation’ as well as ‘good inflation’. Hence, to the extent the present drop in inflation in for example the US reflects a positive supply shock the Federal Reserve should not react to that by easing monetary policy. I have discussed that topic in among others this recent post.

Back to Kurt:

Another is that inflation targeting as it has been both most widely proposed and as it has always been adopted has been a “bygones are bygones” version, with no later compensation for past misses of the target. During the Great Recession, many central banks undershot their targets, even allowing deflation to occur. They never corrected their mistakes. Nominal GDP targeting in the form that ScottSumner and others have advocated it requires the central bank to undo its past mistakes.

Note here that Kurt comes out in favour of the Market Monetarist explanation of the Great Recession. It was the Federal Reserve and other central banks’ failure to keep NGDP ‘on track’ – and even their failure to just hit their inflation targets – that caused the crisis.

And I think it is notable that Kurt notes that “(i)f it (the central bank) undershot last year’s target, it has to increase the growth rate of the monetary base, other things being equal, to meet this year’s target, which is last year’s target plus several percentage points.”

That of course indirectly support for monetary easing to get the NGDP level back on track. I am sure that will enrage some Austrian School readers of freebanking.org in the same way as they recently got very upset by George Selgin apparent defense of quantitative easing in 2008/9. See for example Joe Salerno’s angry response to George Selgin here. See George’s reply to Joe (and Pete Boettke) here.

I am, however, not at all surprised by Kurt’s views on this issues – I knew them already – but I am happy to once again be reminded that Free Banking thinkers like Kurt and George and Market Monetarists think very alike. In fact I personally have a hard time disagreeing with anything Kurt and George has to say about monetary theory. And I would also note that Kurt has been an advocate of the market based approach to monetary policy analysis advocated particularly by Manley Johnson and Bob Keleher in their book “Monetary Policy, A Market Price Approach”. The Johnson-Keleher view of markets and money of course comes very close to being Market Monetarism. For more on this topic see Kurt on Keleher here.

However, I would also use this occasion to stress that Market Monetarists should learn from people like George and Kurt and we should particularly listen to their more cautious approach to central banks as hugely imperfect institutions. This is Kurt:

With nominal GDP targeting it may well also happen that there will be flaws that only become apparent through experience. My reason for thinking that flaws are likely is that, like inflation targeting, nominal GDP targeting is an imposed monetary arrangement. It is not a fully competitive one that that people are at liberty to cease using at will, individually, the way they can cease buying Coca-Coca and start buying Pepsi or apple juice instead. Nominal GDP targeting when carried out by a central bank, which has monopoly powers, is a form of central economic planning subject to the same criticisms that apply to all forms of central planning. In particular, it does not allow for the occurrence of the type of discovery of knowledge that comes from being able to replace one arrangement with another through competition.

I agree with Kurt here. Even if NGDP targeting is preferable to other “targets” central banks are still to a large extent very flared institutions. Therefore, it is in my opinion not enough just to advocate NGDP targeting – or even worse just advocating monetary easing in the present situation – we also need to fundamentally reform of monetary institutions.

Finally, advocating NGDP targeting is not just a plain argument for more monetary easing – not even in the present situation. Hence, it is for example notable that the recent drop in inflation in for example the US to a very large extent seems to have been caused by a positive supply shock. This has caused some to call for the fed to step up monetary easing. However, to the extent that what we are seeing is a positive supply this of course is “good deflation”. So yes, there are numerous reasons to argue for a continued expansion of the US money base, but lower inflation is not necessarily such reason.

7 Comments

Now we are coming exactly at the core diversion between my rather Austrian points and your opinion on Abenomics.
We both agree that Japan’s future is far brighter than many people think.
Already since the year 2000, that some misleading called “deflationary trap”, but was rather a “lack of demand for credit” and a phase of increasing productivity.

Japan was allowing good deflation, i.e. productivity gains and with the stronger and stronger Chinese competition, it was constrained to do so.

1% Japanese deflation is some adherent to the Japanese economy, but it is mostly “good deflation”, especially productivity gains plus some statistical effects like replacements and hedonics for the IT nation Japan.

I would accept NGDP targeting but excluding deflationary effects caused by productivity gains and statistical effects.

This might reduce to the concept of Nominal Wages Targeting or at least preventing nominal wages decreases, like happened in the Great Depression.

Allowing weaker nominal wages might have been the only Japanese mistake between 2000 and 2007, nominal wages fell from 100% to 96.9% (see paper above).

I actually dont agree that Japan had only good inflation. Expectations matter, the BoJ was all over the place. Sometimes the let bad deflation happen, sometimes they tried to go in the other direction. I think there is a old post from G. Selgin about Japan and the years in witch they actually come close to good deflation.

Bank of Japan has been all over the place over the past 15 years. Monetary policy has been horrible and massively discretionary.

It is correct that we effectively from 2002/3 until 2007 had something that “looked like” a productivity norm that allowed for “good deflation”- However, that was certainly not a clear and transparent rule and as result failed badly in 2008/9.

And then you understand why Abenomics can never succeed, it can reach a long-term 2% inflation target. They will need 3% demand inflation to make up for the 1% good (productivity, statistical effects) deflation.

On the other side, Kyle Bass and other Cassandras are brutally wrong when they think that an ageing society can experience inflation and that Japanese investors will prefer US treasuries to JGBs.

JN

Lars, a quick question regarding “good/bad deflation” mentioned by Selgin and you.
I haven’t read everything about NGDP targeting yet, but I couldn’t seem to find an explanation of why targeting a NGDP growth level and not a stable (flat) NGDP (which would also allow for good deflation when times are good and monetary easing when times are bad).